Former Bank of Japan Board Member Suggests Weak Yen Could Prompt Rate Hike in April

A former Bank of Japan board member has indicated that the central bank could raise its benchmark interest rate as early as April, as markets grow highly concerned that the "dangerous" fiscal policy approach of Prime Minister Sanae Takaichi will lead to sustained yen weakness.

"The Bank of Japan must raise interest rates by at least June or July," former policy board member Makoto Sakurai told Bloomberg on Friday, "but this action could also happen in April."

Sakurai's comments preceded a further decline in the yen, following local media reports that Takaichi is considering calling a general election next month. On Tuesday morning in Tokyo, the yen fell to 158.50 against the dollar, hitting a fresh one-year low and approaching the levels that prompted Japan's Ministry of Finance to intervene in the currency market in 2024.

Sakurai's remarks suggest he believes the Bank of Japan will not act to support the yen at either of its next two policy meetings; consequently, the responsibility for propping up the currency falls squarely on the Ministry of Finance if the yen continues to depreciate.

Sakurai noted that while the Bank of Japan raised borrowing costs to 0.75% last month, the highest level in 30 years, this action merely served to prevent further yen depreciation rather than boosting the currency's value as a typical rate hike would.

"The market does not trust Takaichi after she introduced an excessively large economic stimulus package and the budget plan for the next fiscal year," Makoto Sakurai said. "The question is simple: why significantly increase fiscal spending when inflation has already emerged?"

The prevailing market expectation is for the central bank to raise interest rates at a pace of approximately once every six months. Therefore, a rate hike in April would occur sooner than widely anticipated. According to overnight swap trading data from Tuesday morning, traders priced the probability of an April hike at around 40%.

"Takaichi's fiscal measures are causing the yen to weaken," Makoto Sakurai stated. "It is difficult to rebuild market confidence."